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Invest Like Tony Soprano

Learn a little investing lesson from the big guy himself.

I was checking my daughter's investment account recently, and I realized that I'm kind of an idiot.

I'd forgotten that I'd bought a dozen or so shares of Motley Fool Stock Advisor recommendation Quality Systems for her account. I hadn't been tracking the stock or news surrounding the company. I felt like a real idiot until I checked my cost basis and realized that the investment was up more than 250%.

So, maybe we idiots have it right.

Warren Buffett: Idiot Every day, I hear stock jocks gloat and die with each 10% rise or fall in their stock price. But there's a big difference between stock jocks and master investors: Master investors sacrifice short-term gains to build real wealth.

As the head of Berkshire Hathaway, master investor Warren Buffett has said that he expects to "keep permanently our primary holdings." The man has directed Berkshire to an incredible 40-year compounded annual growth rate of more than 20% by doing all his work on the front end -- identifying superior companies -- and then just forgetting about the prospect of selling.

Buffett has never sold a share of Berkshire Hathaway, and he says his performance would have been even better than 20% if he'd never sold a single share of any of his investments. That may sound like an idiot's approach, but those aren't an idiot's results.

Shelby Davis: Idiot Shelby Davis turned $50,000 into a fortune greater than $800 million during a lifetime of saving and investing, landing him (before his death) on the Forbes list of the richest Americans.

Davis is frequently called a B-list money manager, but there's nothing B-list about his returns. Like Buffett, he bought stocks to hold and said that he, too, would have been better off if he had never sold a single investment.

Tom Gardner: Idiot Well, not really, since he's the one who found Quality Systems in the first place. And if I'd bought when he first recommended the company, instead of waiting, my investment would be up more than 600% -- significantly more than the paltry 250% my daughter has earned. But Tom recently told me that his biggest investing regrets are the companies he's sold over the years.

Tom's sold a number of stocks from his Stock Advisor portfolio, and in some cases, those stocks are significantly higher than the price at which he sold them. Whoops. His Stock Advisor picks are still outpacing the market by a wide margin, so you can imagine his regrets on giving up those eventual winners.

The buy-to-hold philosophy really can test your short-term patience. Take TD Ameritrade, for example. In 2002, before the acquisition of TD Waterhouse, Ameritrade's stock was getting hammered. The market at large was down, and individual investors burned by the tech meltdown weren't trading at their 1999 levels. If you'd purchased Ameritrade shares at the end of 2000 because you were confident in the underlying business, and then held through the rough patch in 2002 and 2003, you'd still have doubled your money by now, and you'd be part owner of the new company.

It can be difficult to hold through the market's vicious ups and downs. Having the patience to do so, however, can be quite rewarding.

Consider the performance of seven companies that could have been on even a casual investor's radar five years ago. You could have made a case at the time that each had a sustainable competitive advantage and was worth holding onto for the long haul, whether it was because the company was introducing a hot new technology, because it was where you shopped for office supplies, or because it was the brand of car you drove. Whatever.

Company

Five-year return

Five-year beta

Adobe Systems (NASDAQ:ADBE)

105%

1.7

Capital One Financial (NYSE:COF)

20%

1.5

Ford (NYSE:F)

(40%)

1.8

Office Depot (NYSE:ODP)

74%

1.7

Sirius Satellite Radio

(44%)

2.9

Sun Microsystems (NASDAQ:SUNW)

(37%)

2.8

T. Rowe Price (NASDAQ:TROW)

164%

1.6

*Returns are adjusted for splits and dividends. Data provided by Capital IQ.

Find superior companies As you can see, there can be some danger in the buy-it-and-forget-it approach -- Ford, for example, has fallen on hard times in the past five years. Yet even among this group of randomly selected, more-volatile-than-average companies, the buy-and-forget approach yielded 6.2% annualized returns (just slightly better than the S&P 500 over the period). That's because while stocks bounce around, they also tend to go up.

Of course, you're not randomly selecting companies -- or at least, you shouldn't be. You're looking to identify and buy superior companies with superior prospects, like Quality Systems. These companies are worth holding despite volatility, and finding them is where Tom -- not to mention his brother and Fool co-founder, Dave -- help me.

I read about Quality Systems in Stock Advisor -- our newsletter in which Tom and Dave go head-to-head to find the best stocks anywhere -- and the business made sense to me. As Tom wrote, the company's software helps private-practice physicians automate administrative and diagnostic records. Growing industry. Leader in the field. Smart business approach. Yep, makes sense. So I bought a small chunk and forgot it. That blend of magic and ignorance has turned my investment into a thing of beauty.

Tom and Dave are finding companies like that all the time -- since the newsletter's inception in April 2002, David's picks are up 65%, and Tom's are up 64% compared with the S&P's 27% -- and I plan to keep adding them to my daughter's portfolio before letting them slip once again from my consciousness.

To find the companies you might want to buy and forget, give Stock Advisor a whirl for 30 days for free. You'll get two stock recommendations per month and access to all of David and Tom's 100-plus recommendations. As always, the Fool's money-back guarantee stands behind the offer.

As for Quality Systems, I believe I've found a superior company, and my daughter and I will do well to heed the wisdom of Buffett, Davis, and the Gardners and, in the words of Tony Soprano, just "Fuhgeddaboudit."

This article was originally published on July 22, 2005. It has been updated.